Hotel Chocolat offered a three year, FSA-approved “chocolate bond” to the 100,000 members of its “tasting club” in May 2012 in an attempt to raise £5m. A wonderfully unconventional approach to business funding – what made them take the leap? Many challenges and opportunities came with the project, and lessons were learned, which will help you understand the ups and downs of private bonds; and help you decide whether this is an approach to business finance you could take, too.
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Peter Harris is on stage now, telling us the story of the Hotel Chocolat bond. “One of the reasons we tried to raise finance from our customers was the nature of our business: privately owned and run. We had lots of ideas that were a bit unconventional; the idea of buying a cocoa plantation didn’t go down well with banks.”
Harris warns of the complications that can come with this alternatively regulated finance source. “My biggest fear was that we didn’t understand the FSA regulations in terms of raising money from individuals. Around 2010 we approached a firm of accountants and came up with the idea of this chocolate bond. We came up with the idea of getting members from our chocolate club to loan us money, and in return we would give them chocolate. And that’s what they wanted.”
£2,000 worth of money gave bond holders six boxes of chocolate a year – worth about £20 a box. “They were buying lots of chocolate on a regular basis anyway.
“We selected about eight of our customers in a room and asked them, ‘We’re thinking of raising some money like this… would this be of interest?’ and we got a very positive response. It was positive and people seemed honest. Then we wrote to 1,000 of our members to see if the idea would be well received. This would give us a realistic reading. We got a very good response.“
Another three months went by, and, to be careful, Hotel Chocolat wrote to another 5,000 people. “We got the same result as we did from the first 1,000. One of the things we had very clear was that we wanted to tell our customers what we were going to spend the money on. We put four things down: creating manufacturing jobs in the UK, developing sustainable cocoa grain in St Lucia, growth of our UK retail store portfolio, and exporting British chocolate.”
Members of the chocolate tasting club received a box of chocolate, and a newsletter, called ‘Chocolate News’ with stories about the business. This included stores they were opening, ethical initiatives across different projects, such as the Ghana initiative.
“Something to understand about this type of funding is that it’s not trade-able. If your business is doing stunningly well, they’re not going to get more than… chocolate. After three years, they get their money back.”
Private bonds are not FSA approved. “It’s outside their scope; this is why you definitely need a lawyer. You need to be careful that you don’t blur it. We made sure not to put forecasts in our chocolate bond document, for example. We showed figures, but they were historics.”
The secret to a successful private bond? It’s not the return. “I think people generally liked our business. They responded to our product, ethical stance, innovation. It made them think, ‘I want to support this.’ I think virtually nobody went in on the purpose of the interest rate. If you like a business, you want to support it – genuinely, because people want to see these businesses for years to come. Our customers wanted to be part of the bigger story,”
Hotel Chocolat initially raised £3.7m through the chocolate bond. “We thought we ought to raise that amount of money. But it’s nothing until you’ve got it.
“For doing this, you need to think: are you directly in touch with your customers? Perhaps the most powerful thing about Hotel Chocolat is that we have a direct relationship with our customers. We have the ability to contact them. If you’re in a different situation, and have no direct connection, you have to somehow find that.”
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